More twists and turns on the cards

Tony Blair’s credentials as a Middle East peacemaker remain mired in controversy. But the former UK prime minister certainly doesn’t miss a trick when it comes to intervention at a corporate deal-making level.

Just when it seemed the $US58 billion merger between Glencore and Xstrata was all but buried, Blair turned up as the JPMorgan-backed fixer with the Middle East connections to try and massage the deal over the line. Any “merger of equals" involving two of the biggest egos known to the mining industry – Glencore’s Ivan Glasenberg and Xstrata’s Mick Davis – was always going to be an unpredictable affair.

The two men are friends but also fierce rivals. Under the original tie-up proposal laid down in February, Glasenberg was to play second fiddle to Davis who would lead the merged “Glenstrata" group. It seemed an uncomfortable arrangement, but it was a detail largely forgotten in the few months since as Xstrata investors demanded a bigger slice of the pie.

Blair, employed by JPMorgan as an adviser, was about to play a central role in trying to resurrect the merger although it took until last Thursday for him to appear on the scene as a peace broker.

The Middle East connection started to simmer earlier this year when Qatar’s sovereign wealth fund, which then owned only a 2 per cent stake in Xstrata, started making noises about pushing for a more attractive deal than the 2.8 Glencore shares on the table at the time.

As Qatar Holding started to build its stake in Xstrata to the current 12 per cent, it quickly became a kingpin in the deal, given Glencore had been barred from voting its own 34 per cent stake in Xstrata as part of the merger arrangement.

While some investors were clearly unhappy with aspects of the deal like Davis’s extraordinary $58 million retention package, Qatar was fixated on price. With a somewhat patchy record of international investments, questions were being asked within the Gulf nation whether Qatar was squandering its gas riches on a company about to be undervalued in a merged entity.

The tiny Gulf emirate demanded 3.25 Glencore shares for every Xstrata share. Glasenberg was dead against any revision but as the months went by and talk grew of the deal being dead in the water, something had to give.

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With Qatar effectively holding the power to block the deal, Tony Blair was called on for his long friendship with Qatari Prime Minister Hamad bin Jassim al-Thani. In a meeting in London on Thursday night, Blair managed what looked like a deal-making coup: convincing al-Thani to soften his government’s insistence on 3.25 Glencore shares while pushing Glencore’s Glasenberg to meet somewhere in the middle.

After hours of negotiation, there was a compromise: Glencore would up its offer to 3.05 shares to get the deal over the line. But Glasenberg wasn’t done there. For someone who appeared determined to play it cool, there was a kicker which Xstrata was to learn to its horror on Friday. The Glencore chief would be chief executive of the merged group, effectively signalling that the merger of equals had turned closer to a hostile takeover. Blair had, perhaps unwittingly, turned a friendly rivalry between Glasenberg and Xstrata’s Davis into an escalating coup.

Xstrata is aghast but going through the motions of asking for a full proposal. Blair’s few hours of work are done but this deal almost certainly has more twists and turns to come, with Qatar likely to remain in the hot seat.
Perry Williams is the Financial Review’s resources editor.
perry.williams@afr.com.au